ADBE’s Surge Validates Post-Earnings Call-Buying

Adobe Systems, Inc. (ADBE) surged as high as 17% today after news leaked about a private meeting between ADBE and Microsoft (MSFT) company executives. The most salient rumor surrounding this meeting is that MSFT is considering acquiring ADBE in addition to other strategic options for going after Apple’s (AAPL) dominance in the mobile device market. The tech news buzz is now engulfed with speculation supporting and dismissing the implications of this meeting. For example, Doug Kass tweeted his doubts about the validity of the rumors citing: “adobe acq would strain msft’s balance sheet, alienate some adbe partners (and msft shareholders) and have anti trust issues.” He even put his money where his mouth is: “i am renting a short in adbe at 28.60 because i think the msft/adbe story is not true, if it was msft would have been weaker.”

I have no opinion on the potential scenarios, but I am more inclined than usual to believe “something” big is brewing given the massive amount of call-buying on September 22 in the aftermath of ADBE’s disappointing earnings report. ADBE cratered 19% that day leading me to speculate that the technical set-up looked like a wash-out event that was worth buying. The huge call-buying activity served as confirmation of the good risk/reward. (See this comment to my posting on Seeking Alpha for some detailed fundamental reasons to stay bullish on ADBE – and a brief counter-argument).

I suspect we will hear official news about what is going on very soon because the vast majority of the calls purchased post-earnings expire next week (October 15th). Until then, I will be doing my best to hold onto my positions.

ADBE surges into the post-earnings gap before pulling back to the 50DMA resistance
ADBE surges into the post-earnings gap before pulling back to the 50DMA resistance

*Chart created using TeleChart:

(Note that the imminent ADBE-MSFT news could also have a very significant impact to the pairs trade I discussed earlier going long Intel (INTC) versus short MSFT. I have since closed out the INTC calls and even took a second opportunity to profitably trade in and out of additional INTC calls. I passed on an opportunity to close out the MSFT puts at the buying price and instead added to the MSFT puts after their price collapsed again. I traded much more than I would have liked, but the overall pairs trade position is flat now. I will report on the full details after I unload the puts or they expire).

Be careful out there!

Full disclosure: long ADBE shares and call spread, long MSFT puts

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